Maintaining life insurance through an employee benefit plan can be a difficult process. Many plans set out complicated administrative requirements that can trip up an employee, resulting in a loss of coverage.
The good news is that, under ERISA, plan administrators must discharge their duties solely in the interests of participants and beneficiaries. In the context of life insurance, plan administrators cannot take an employee’s premiums for years, and then, upon that employee’s death, rely on technical arguments as a basis for not paying out the proceeds to a beneficiary.
Recently, the Sixth Circuit discussed the fiduciary duties of a plan administrator in Van Loo v. Cajun Operating Co. (2017). In that case, a corporate attorney (the “Employee”) for Church’s Chicken (the “Employer”) had an employee benefit plan that offered her life insurance. Throughout her employment, she gradually increased her coverage, eventually seeking to be insured at over $600,000. However, the Employee failed to submit an “evidence of insurability” form as required to obtain supplemental life insurance coverage over $300,000.
The Employee consistently paid her premiums for her supplemental life insurance until her death from cancer. After she died, the insurance company only paid her parents (the Employee’s beneficiaries), the guaranteed amount, and not the $600,000 the Employee thought she had obtained.
Seeking the remaining amount they believed they were owed, the Employee’s parents filed a lawsuit against the insurer and the Employer, which administered the plan. The parents argued that the Employer made material misrepresentations to their daughter with respect to her life insurance benefits when it led her to believe that she had the full amount of coverage that she had requested. The federal district court granted the plaintiff’s motion for summary judgment on the basis that the Employer breached its ERISA fiduciary duty to administer the group life-insurance policy in the sole interest of the employees and their beneficiaries.
Under ERISA case law, a fiduciary is liable when its misrepresentations cause an employee to be inadequately informed with respect to obtaining benefits. However, to prevail on a breach of fiduciary duty claim, a plaintiff must show that she relied on the fiduciary’s misrepresentations to her detriment. In other words, there is no breach of fiduciary duty if the employer’s misrepresentations did not affect the employee’s or beneficiary’s claim for benefits.
Throughout the lawsuit and appeal, the Employer did not dispute that it was a fiduciary under ERISAꟷand that it misrepresented to the Employee that she had supplemental insurance when she did not. However, the Employer claimed that the Employee had a range of serious health issues that pre-dated her cancer diagnosis. Because of those conditions, Employer argued, she could not have qualified for supplemental life insurance either under her employee-sponsored plan or under a private market plan. Therefore, it argued, the Employee could not have “detrimentally” relied on the Employer’s misrepresentations.
The Sixth Circuit rejected the Employer’s argument, observing that it did not provide anything more than speculative evidence that the Employee was uninsurable. As the court noted, the Employee elected supplemental coverage, paid the premiums, and passed on the opportunity to seek coverage elsewhere believing that, if she died, her beneficiaries would receive the full level of coverage under her Employer’s plan. That was enough to show that the Employee detrimentally relied on the Employer’s misrepresentations, the court ruled.
It is important to note that, in the Van Loo case, there was no dispute that the Employee failed to submit the evidence of insurability form as required under the terms of the plan. Had the Employer simply rejected her application and returned her premiums, it could have defended its decision not to pay the full amount of the Employee’s supplemental insurance. The problem arose when the Employer accepted the Employee’s premiums, leading her to believe that she was insured at the over $600,000 amount she sought to obtain. That act amounted to a series of ongoing misrepresentations, which was a breach of the fiduciary duty the Employer owed to its Employee as the administrator of the plan. (As an aside, in a similar case involving a life insurance policy purchased on the private market, a court would likely arrive at the same decision and overturn the insurer’s denial of benefits. The court’s reasoning, however, would differ from a court deciding the matter under ERISA case law.)
Plan administrators will often use technical reasons as a pretense for denying coverage under life insurance and disability policies. However, under ERISA, they have a fiduciary duty to administer employee benefit plans in good faith. If you believe you have been wrongly denied coverage, consult with a law firm experienced in life insurance and disability insurance litigation.